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2025 (6) TMI 537 - AT - FEMAUnaccounted amount recovered from premises - contravention of Section 10(4) of FEMA r/w with RBI Master Circular No. 10/2013-14 - HELD THAT - In view of the incriminating material on record we agree with the contention of Ld. Counsel for the respondent ED that appellant failed to justify the unaccounted amount of Rs. 7, 21, 800/- recovered from his premises. The defence taken by the appellant is apparently an afterthought strategy to show that the said amount Rs. 3, 00, 000/- pertains to his employee Mr. Leenas and the remaining amount of Rs. 4, 21, 800/- was kept by him on account of withdrawal in the previous week. Except self-serving statement there is no corroborative documentary evidence in this regard. Hence the same is certainly a lame defence. Accordingly the order qua the finding of contravention is hereby upheld. Quantum of penalty the penalty of Rs. 4, 00, 000/- seems to be unjustified seeing the fact that the sum of Rs. 7, 21, 800/- was seized from the premises of appellant is already confiscated by ED. Moreover there is nothing on record that appellant is a habitual offender in committing the contraventions. Hence by taking a lenient view we hereby reduce the penalty from Rs. 4, 00, 000/- to Rs. 1, 00, 000/-. The pre-deposit if any be adjusted against the said penalty of Rs. 1, 00, 000/-. The remainder/ excess if any be adjusted within period of three months from the date of expiry the period of limitation for filing the appeal.
The core legal questions considered in this appeal under Section 19 of the Foreign Exchange Management Act, 1999 (FEMA) are:
1. Whether the appellant violated Section 10(4) of FEMA by maintaining unaccounted cash amounting to Rs. 7,21,800/- in contravention of Reserve Bank of India (RBI) regulations and the Master Circular No. 10/2013-14 dated 01.07.2013 governing money changing activities. 2. Whether the appellant failed to maintain and produce the statutory records and registers as mandated by RBI guidelines for money changing businesses. 3. Whether the penalty of Rs. 4,00,000/- imposed by the Adjudicating Authority under Section 16 of FEMA is justified in light of the facts and circumstances of the case. 4. Whether the appellant's defense that a portion of the seized amount belonged to his employee and the balance was legitimately withdrawn from bank accounts is substantiated by credible evidence. 5. Whether there is any connection of the appellant with hawala or illegal money transfer activities. Issue-wise Detailed Analysis: 1. Violation of Section 10(4) of FEMA and RBI Master Circular Compliance Relevant Legal Framework and Precedents: Section 10(4) of FEMA mandates that authorized persons engaged in foreign exchange dealings must comply with directions issued by the Reserve Bank of India and not engage in transactions outside the terms of their authorization. The RBI Master Circular No. 10/2013-14 prescribes detailed record-keeping requirements for Authorized Money Changers (AMCs), including maintenance of various FLM registers and books to ensure transparency and accountability in money changing transactions. Court's Interpretation and Reasoning: The Court noted that the appellant operated a money transfer business as a franchisee of reputed companies like Western Union, Xpress Money, Money Gram, and Transfast. However, during searches, unaccounted cash of Rs. 7,21,800/- was seized from the appellant's premises, which raised serious concerns about compliance with FEMA and RBI regulations. The appellant admitted the amount but claimed part of it belonged to his employee and the rest was withdrawn from his bank accounts. Key Evidence and Findings: The appellant's employee, Shri Leenas, stated that Rs. 3 lakh was a gold loan amount taken by him and kept in the office for loan closure, while Rs. 4.2 lakhs was withdrawn from bank accounts in the preceding week. However, the employee failed to produce documentary evidence supporting these claims. The loan was verified as taken but the source of repayment remained unexplained despite repeated requests. Additionally, discrepancies were found between the daily transaction amounts claimed by the employee and the commission details furnished, undermining the credibility of the defense. Application of Law to Facts: The failure to maintain and produce statutory records such as FLM forms and concurrent audit reports, as required by the RBI circular, coupled with the presence of unaccounted cash, constituted a clear violation of Section 10(4) of FEMA. The Court emphasized that the registers and books should be kept up-to-date and should clearly segregate money changing transactions from other business dealings, which was not done. Treatment of Competing Arguments: The appellant argued that the unaccounted cash was part legitimate business funds and part employee's loan amount, supported by bank withdrawals and gold loan documentation. The respondent contended that these claims were unsubstantiated, and the employee's statements were inconsistent and unreliable. The Court found the respondent's arguments more persuasive due to lack of corroborative evidence from the appellant's side. Conclusion: The Court upheld the finding of contravention of Section 10(4) of FEMA and non-compliance with RBI's Master Circular, confirming that the appellant held unaccounted cash in violation of the regulatory framework. 2. Failure to Maintain and Furnish Statutory Records Relevant Legal Framework: The RBI Master Circular mandates maintenance of various registers and forms (FLM 1 to FLM 8, RLM 3, Annex-XIV & XV) and concurrent audit reports for money changing activities. These records are essential for regulatory oversight and ensuring compliance with foreign exchange laws. Court's Interpretation and Reasoning: The appellant was repeatedly asked to furnish these statutory records but failed to do so despite reminders and notices. The delay and eventual non-production of these documents indicated non-compliance with RBI instructions. Key Evidence and Findings: The appellant submitted some documents belatedly but failed to provide the complete set of required records. The incomplete documentation impaired the investigation and enforcement process. Application of Law to Facts: Non-maintenance and non-production of statutory records is a breach of the regulatory framework governing authorized money changers and constitutes an independent violation under FEMA. Treatment of Competing Arguments: The appellant claimed ignorance and educational limitations as reasons for non-compliance, but the Court found these insufficient to excuse the failure to maintain proper records. Conclusion: The Court confirmed the appellant's failure to maintain and produce statutory records as required under FEMA and RBI guidelines. 3. Justification and Quantum of Penalty Relevant Legal Framework: Section 16 of FEMA empowers the Adjudicating Authority to impose penalties for contraventions of the Act. The penalty amount should be commensurate with the gravity of the violation and the circumstances of the case. Court's Interpretation and Reasoning: The Adjudicating Authority imposed a penalty of Rs. 4,00,000/- on the appellant for the violation. The Court observed that the seized amount of Rs. 7,21,800/- was already confiscated, and there was no evidence that the appellant was a habitual offender. Taking a lenient view, the Court found the penalty excessive given the facts. Key Evidence and Findings: The appellant's income tax returns and commission details showed some legitimate business activity. The absence of prior violations and the confiscation of the seized amount were mitigating factors. Application of Law to Facts: The Court balanced the enforcement of regulatory compliance with fairness in penalty imposition, reducing the penalty to Rs. 1,00,000/-. Treatment of Competing Arguments: The appellant sought reduction citing educational background and family responsibilities, while the respondent urged for upholding the penalty. The Court adopted a middle path by reducing but not cancelling the penalty. Conclusion: The penalty was reduced from Rs. 4,00,000/- to Rs. 1,00,000/- considering the totality of circumstances. 4. Alleged Involvement in Hawala Transactions and Illegal Money Transfer Relevant Legal Framework: Hawala transactions are illegal and prohibited under FEMA and related laws. Establishing involvement requires credible evidence linking the accused to such activities. Court's Interpretation and Reasoning: The appellant denied any involvement in hawala or illegal money transfer. The seized documents from the car parked at his residence were disclaimed by him. The Court found no direct evidence linking the appellant to hawala activities despite the involvement of his partner in a smuggling racket. Key Evidence and Findings: The investigation revealed the partner's involvement in smuggling and detention under COFEPOSA, but no incriminating evidence was found against the appellant in this regard. Application of Law to Facts: Mere association with a partner involved in illegal activities does not establish guilt unless supported by evidence. The Court adhered to this principle. Treatment of Competing Arguments: The appellant's defense was accepted on this point, while the respondent failed to produce evidence to the contrary. Conclusion: The Court held that there was no proof of the appellant's involvement in hawala or illegal money transfer transactions. 5. Credibility of Statements and Evidence Regarding Source of Seized Cash Court's Interpretation and Reasoning: The statements of the appellant and his employee were inconsistent and lacked documentary support. The employee's explanation about the gold loan and cash kept for repayment was not substantiated by evidence of the source of repayment. The discrepancy between claimed daily transactions and commission details further undermined credibility. Key Evidence and Findings: Verification of gold loan existence was positive, but repayment source was unexplained. Bank statements of withdrawals were not produced. The employee's failure to respond to official letters requesting clarification was noted. Application of Law to Facts: The lack of credible evidence to justify the seized cash led to the conclusion that the amount was unaccounted and in violation of regulatory norms. Treatment of Competing Arguments: The appellant's defense was treated as an afterthought and insufficient to rebut the presumption of contravention. Conclusion: The Court rejected the appellant's explanation and upheld the finding of unaccounted cash. Significant Holdings: "The appellant failed to justify the unaccounted amount of Rs. 7,21,800/- recovered from his premises. The defence taken by the appellant is apparently an afterthought strategy... Except self-serving statement, there is no corroborative documentary evidence in this regard. Hence, the same is certainly a lame defence." "The penalty of Rs. 4,00,000/- seems to be unjustified, seeing the fact that the sum of Rs. 7,21,800/- was seized from the premises of appellant is already confiscated by ED... Hence by taking a lenient view, we hereby reduce the penalty from Rs. 4,00,000/- to Rs. 1,00,000/-." "There is no link between the appellant or any other person to prove that the appellant was involved in any Hawala business." Core Principles Established: - Authorized persons under FEMA must strictly comply with RBI directions and maintain proper statutory records for all foreign exchange and money changing transactions. - Seizure of unaccounted cash in the premises of an authorized money changer without credible explanation constitutes a violation of Section 10(4) of FEMA. - Mere association with persons involved in illegal activities does not establish guilt without direct evidence. - Penalty imposition under FEMA should consider the nature of contravention, prior conduct, and confiscation of seized amounts, allowing for leniency where appropriate. Final Determinations: - The appellant was held to have contravened Section 10(4) of FEMA by maintaining unaccounted cash and failing to maintain statutory records as per RBI guidelines. - The penalty imposed by the Adjudicating Authority was upheld in principle but reduced from Rs. 4,00,000/- to Rs. 1,00,000/- considering mitigating factors. - The appellant was not found to be involved in hawala or illegal money transfer activities based on the evidence on record.
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